In the US, inflation is just as high as it is in the European Union — if not higher. Yet it seems to be hurting the American economy much less. Why?
Léa Marchal
Production: By Europod, in co-production with Sphera Network.
EUobserver is proud to have an editorial partnership with Europod to co-publish the podcast series “Briefed” hosted by Léa Marchal. The podcast is available on all major platforms.
Find the full transcript below:
In the United States, inflation is just as high as it is in the European Union—if not higher. Yet it seems to be hurting the American economy much less.
So why are Europeans feeling the pain more intensely, and how much higher could prices still go?
The US economy is among those least affected by the war in the Middle East. That’s according to a report published on Monday by the Peterson Institute for International Economics.
According to the institute’s estimates, US GDP is expected to end up about 1.2 percentage points lower than previously forecast.
For Europeans, the picture looks less encouraging. The same report suggests the EU could face a drop of almost two percent.
And yet, inflation is currently higher in the United States than in the euro area: around four percent compared with roughly three percent in April.
So what’s behind the difference?
The short answer is that inflation benefits Americans more than it benefits Europeans.
Let me explain.
At the heart of the issue are gas and oil prices.
Because energy is traded on global markets, Americans are paying high prices too.
The difference is that much of that money stays within the US economy.
The United States produces roughly two-thirds of the oil it consumes. As for natural gas, imports account for only a small share of domestic demand.
So when Americans spend more on energy, a large part of that money ends up in the pockets of American producers. Not only does that support the domestic economy, but the US also exports energy abroad, generating additional income.
Europe, by contrast, is paying a heavy price for its dependence on imported oil and gas.
And energy isn’t the only issue.
The same applies to fertilisers, which are essential for agriculture and are largely imported from outside the EU.
Once again, the United States has an advantage: it is the world’s third-largest fertiliser producer.
So when it comes to the long-term solution for Europe, we already know what it is: expanding renewable energy as much as possible.
The more renewable electricity we produce, the less exposed we are to imported fossil fuels, and the lower energy costs can become over time.
But in the short term, many European consumers are asking a simpler question:
How high can prices go?
The answer depends largely on how long the war lasts.
And of course, nobody really knows that.
While waiting for a resolution, the European Central Bank has already taken action by raising interest rates.
In practical terms, borrowing becomes more expensive, while saving becomes more attractive.
That applies to households as well as businesses.
The goal is straightforward: if people spend less, demand falls.
And when demand weakens, businesses find it harder to raise prices.
That’s how central banks try to break the inflation cycle.
There is one important caveat, though.
Not all prices can easily come down.
Some sectors — such as real estate or commodities with highly variable costs— may see prices ease.
But many services operate on already thin margins.
Take a restaurant owner, for example.
Energy bills remain high, wages have often increased alongside inflation, and operating costs are still elevated.
In that situation, lowering prices simply isn’t realistic.
That’s why some trade unions criticised the ECB’s decision.
They argue that higher interest rates could actually be counterproductive because they make it more expensive to invest in clean energy projects.
And that could slow down the very renewable energy transition that Europe needs.
So policymakers face a delicate balancing act: reducing inflation without choking off growth.
In an ideal world, inflation would stay at around two percent.
Prices would continue to rise gradually, wages would keep pace, and businesses would still have the confidence to invest.
But that’s not the world we’re living in today.
Inflation has risen above three percent in just a few months, and perhaps more importantly, uncertainty continues to weigh on both households and businesses.
